A little money, lots of time can make teen a millionaire

Summer jobs and saving for retirement are not often in the same thought, but there is a connection.

A teenager could have more than $1 million at retirement, with very little effort, if he or she starts saving from that first summer job.

Contrary to popular opinion, some young people do know how to save money, rather than just spend.

When she was growing up in Hollywood, Fla., Deborah Koch was like most teens. She liked to buy things. Anything.

So she went out and landed a job. She worked for her dad in his office, filing papers, running errands, putting things away.

Her dad is Jeffrey Koch, a certified public accountant, money manager and personal finance specialist. He started filing tax returns for Deborah; son, Matt; and daughter, Terri, as soon as the money from lawn mowing or baby sitting began to come in.

Deborah is now a senior vice president at Gibraltar Private Bank & Trust in Coral Gables, Fla.

"All three of my children funded individual retirement accounts very early in their lives, courtesy of their compulsive father," Jeffrey Koch said.

By the time Deborah landed her first job that was not at Dad's office, she was 16 and well along in saving for retirement.

The Koch children put half their earned income as teens into their retirement accounts. It's important to note that money going into a retirement account must be earned rather than be a gift from parents or family. That's why Jeffrey Koch filed the kids' returns as soon as they started making money.

In other families, I've heard that parents match that contribution by giving the kids the amount they saved in the IRA.

At a later date, Dad converted the traditional IRAs to Roth IRAs for the children, so that their future retirement withdrawals will be tax free. Then the money grew.

"He would show us the statements," Deborah Koch said. "At the time, it didn't mean very much. But it got bigger and bigger."

A few years ago, when her balance neared $40,000, Koch decided to take a $10,000 withdrawal that is allowed for first-time home buyers from a Roth IRA.

That's how her summer jobs helped her to buy her condo.

And she still has a substantial sum set aside for retirement. Koch is 37. She has three decades in which to watch her savings grow.

The lesson she got from her dad: "He showed us the value of time."

There are two things you can control about your retirement. One is when you start to save. The other is how much you save.

"Almost everyone focuses on areas where you have very limited control. You don't control interest rates, the dollar goes up and down, stocks go up and down," said Fran Kinniry, a principal in Vanguard's Investment Counseling and Research Group. "You can't choose what the investment environment is going to be, but you can choose how early you start saving."

Kinniry ran some numbers that will show this to the teenagers in your life.

Call it the 15-to-25 retirement portfolio.

Imagine a teenager opening an IRA at age 15 and contributing to it for only 10 years, then not adding another nickel. Kinniry started the account with the $3,000 minimum that Vanguard requires, then had the young worker contribute $2,000 a year for the next nine years. He would put 60 percent of the money into a broad stock portfolio and 40 percent in bonds. Kinniry ran thousands of possible market scenarios, involving good years and bad, to see how this portfolio would be likely to grow.

When the teenager is 65, the median value--half the results were higher, half lower--of the 15-to-25 retirement portfolio is $1,170,536.

The kid's a millionaire because his portfolio had 50 years to grow.

Just to compare, I asked Kinniry to run the same numbers for someone who contributed from ages 30 to 40 and 40 to 50. Even though the same dollar amounts went into the accounts, the results aren't even close, due to the impact of time. The 30-to-40 portfolio would turn into $285,966 by age 65. The 40-to-50 would become $126,519.

Anyone "who is able to start a program that early, what a windfall this could be to them later in life, even with only minor contributions," Kinniry said.

Of course, $1 million today isn't going to be worth $1 million 50 years from now. Inflation will lessen its purchasing power, and taxes, if the money is in a traditional IRA, will take a big bite. And teenagers have immediate money needs that may be more pressing too.

But I'm impressed by the power of a little bit of money at work for a long time.

Few adults have $1 million in a retirement account these days, according to the surveys.

Perhaps the kids could do better.Harriet Johnson Brackey is a columnist for the South Florida Sun-Sentinel, a Tribune Co. newspaper.